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Buy Tata Power Company Ltd For Target Rs.262

Tata Power Company (TPWR) reported another strong quarterly performance in Q2FY23 buoyed by higher profits from coal and Mundra businesses, recovery in profits of TPSSL and Tata Projects, and strong performance of distribution businesses. On consolidated basis, the company’s reported revenue for the quarter, at Rs141.5bn, was up 49% YoY mainly due to higher power sales across discoms and higher revenue from coal businesses. Reported PAT was up 85% YoY at Rs9.4bn (TPWR’s share of profit was Rs8.2bn, up 94% YoY). As per our computations, main delta in profits, both QoQ and YoY, came from the performance of coal and Mundra businesses, while the Rs2.3bn QoQ recovery in bottomline for Tata Projects was negated by a similar amount of deferred tax provision. For CGPL, tariff determination by CERC as per section-11 of the Electricity Act may help reduce under recoveries related to variable charges, and may increase profit for FY23 beyond our revised estimates. Maintain BUY.

* Another quarter of strong revenue and profit growth: For Q2FY23, TPWR’s reported revenues (consolidated) were up 49% YoY at Rs141.5bn, while reported consolidated PAT was up 85% YoY at Rs9.4bn (TPWR’s share of profit was Rs8.2bn, up 94% YoY). Underlying EBITDA was Rs32.6bn, up 38.5% YoY. GreenCo EBITDA increased by 4% YoY to Rs7.4bn. Main factors impacting Q2FY23 performance were: 1) good performance of all discoms due to higher power demand (Odisha discoms posted cumulative profit of Rs620mn); 2) higher profit from CGPL + coal companies on both QoQ and YoY basis as well as sale of power under section-11 of the Electricity Act; 3) RE capacity addition and good growth in all RE businesses; 4) Rs500mn profit for TPSSL vs Rs330mn loss in Q1FY23; 5) turnaround in Tata Projects, which posted profit of Rs60mn vs loss of Rs2.2bn in Q1FY23 and consecutive quarterly losses since Q1FY22. TPWR’s net debt at Q2FY23- end reduced to Rs395bn despite capex of >Rs30bn during H1FY23. While receivables remained high (but under control) at Rs93.6bn, we expect it to decline going forward as disputed amounts are being paid by the relevant discoms in instalments.

* CGPL and coal companies’ profits increase: Substantial increase in Mundra PAF (92% in Q2FY23 vs 28% in Q2FY22) and higher coal prices were the main factors aiding increase in TPWR’s PAT, both QoQ and YoY. CGPL has been booking sales under section-11 of the Electricity Act from 5th May’22 onward. This notification, which has been extended up to 31st Dec’22, provides for full compensation of cost of power generation by the buyer along with a certain profit, to be determined by the regulator (CERC). The MoP has given an interim tariff based on which CGPL has been billing the offtakers. For capacity charges, CERC’s recent favourable order helped recognise Rs4.6bn additional revenue during Q2FY23 (Rs1.5bn pertaining to Q1FY23). We believe, once CERC approves the tariff, Rs4bn-5bn under-recovery of variable charges may be reversed in the coming quarters resulting in further increase in profits.

* Valuations and outlook: We revise our estimates for FY23 and FY24 factoring-in the higher coal prices and earnings on sale of power from Mundra plant under section-11 of the Electricity Act. We maintain BUY rating and our SoTP-based target price of Rs262. The stock is currently trading at FY24E P/E of 23.7x and P/B of 2.6x.

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